Santos reworks $2.2bn gas deal after oil crash

Santos has slashed its spending for 2020, reducing its break-even oil price and had to delay an investment decision on Barossa.

Santos holds a 43.4 per cent stake in Darwin LNG and 50 per cent in Barossa but reiterated it plans to sell 10 per cent of its Barossa holding.

Santos has reworked a $2.2bn gas deal with US giant ConocoPhillips following the biggest oil crash in a generation, with a smaller upfront payment after it was forced to defer its Barossa project as crude prices plunged.

An initial deal was struck in October which saw Santos scoop up Conoco’s dominant stake in Darwin LNG along with its interests in the Bayu-Undan, Barossa and Poseidon gas fields off northern Australia.

The buyout was seen clearing the way for Santos and its partners to make a final investment decision on its $US4.7bn ($7.1bn) Barossa project in early 2020 and process its gas through the existing plant at Darwin with the Bayu-Undan fields currently feeding the LNG plant running out of gas in 2022.

However, by March Santos was forced to slash its spending for 2020, reducing its break-even oil price and delaying an investment decision on Barossa in response to the plunge in crude prices and coronavirus volatility.

The two companies resumed talks at the negotiating table, resulting in Santos paying $US1.265bn upfront rather than the original $US1.39bn payment — while a contingent payment once Barossa reaches a final investment decision increased to $US200m from $US75m.

“We announced the deal last October and at that time we had no idea the world was going to change like it did at the beginning of this year,” Santos chief executive Kevin Gallagher said. “It was a concluded, sealed deal and we managed to have a very positive conversation over the past couple of months over restructuring it in light of the fact the project had been delayed.”

Santos had hoped to make a final investment decision on the Barossa gas project in northern Australia by the June quarter but has deferred any move until market conditions improve.

While conceding Conoco would have preferred a higher upfront payment, the reworked deal represented the reality of the current market, according to the Santos chief.

“You’re right in presuming they would have liked more of an upfront payment but I’m not going to comment on how tense or otherwise those negotiations were. I’m just pleased Conoco recognised there was a need for both companies to share the impact of the delay.”

Santos said it was reviewing one of the major contracts on Barossa to see if an alternative structure could boost the value of the project, which is thought to be either the floating production and storage unit or the oil and gas rig.

“We’re going to take the opportunity to see how we can reset some of the costs on the project in this environment and improve the economics even further,” Mr Gallagher said.

Despite the big industry downturn, Santos said it had no regrets over the timing of the Conoco deal.

“We think strategically this is right on the money this project. Sure there’s always risk in any M&A transaction but it’s a whole lot less risk than buying a project yet to be developed.”

Santos holds a 43.4 per cent stake in Darwin LNG and 50 per cent in Barossa but reiterated it plans to sell 10 per cent of its Barossa holding and is also in talks with buyers over selling gas volumes from the project.

Santos funded the deal with cash and a $US750m debt facility. It holds net debt of $US3.75bn overall with gearing at 32 per cent.

Its shares closed down 3.2 per cent on Thursday, at $5.44 each.